Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Barrick Gold (NYS: ABX) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Barrick Gold.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
8 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Barrick Gold last year, the company has dropped a point. Rising debt levels are responsible for the drop, although dividend growth and continued strength in profitability show just how strong gold has been lately.
Barrick's attractive numbers are due largely to the big rise in gold prices over the past decade. The move has made gold extremely popular, with the SPDR Gold ETF (NYS: GLD) booming in size to hold almost 1,300 metric tons of the yellow metal. Certainly Barrick's dividend growth is directly attributable to higher bullion prices, as it has linked its dividend to the prevailing price of gold. That's a trend that has taken hold among other major gold producers, as Newmont Mining (NYS: NEM) has a similar policy.
Still, even miners have to grow, and Barrick is looking for future success from new projects. Its Pueblo Viejo joint venture with Goldcorp (NYS: GG) should start producing later this year. But the capital costs in the industry can be extreme, as Barrick ended up having to raise its construction budget for its Cerro Casale project by nearly $2 billion last year after buying an additional 25% interest from Kinross Gold (NYS: KGC) .
The biggest threat to Barrick's success would be a long-awaited correction in the price of gold. Reasonable Fools disagree about whether that's likely, but as long as bullion prices stay high, you can expect Barrick to stay near the top end of our 10-point scale.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.
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